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08 October 2021
The current energy crisis is not only a consequence of events over the past few weeks, but also a toxic combination of existing structural industry challenges combined with macro-economic factors.
These issues will create challenges for energy firms as they manage higher levels of arrears and problem debt. Higher account balances and higher total debt levels will invariably see increases in bad debt provisions and write-offs.
In this week's Just Insights, we look at the causes of the energy crisis and how energy firms can take practical action to respond.
A race to the bottom
The regulator and the government were naturally keen to stimulate competition which was hoped would see lower prices for customers - an admirable vision, but one that needed careful planning and governance.
But just how effectively was this done? It’s widely suggested that insufficient due diligence was carried out on firms and their directors, prior to being able to set up as an energy supplier. Was it really as simple as buying a pre-packaged company for a relatively modest sum and start selling energy? Were the checks done on new entrants’ financial standing sufficient? Who was questioning the hedging and pricing strategy to ensure risk was being adequately managed?
The rise in fuel poverty
Citizens Advice Scotland recently published an article stating that one in four Scottish households were deemed to be fuel poor (defined as those spending >10% of their income on energy1). With fixed prices due to increase significantly in the next few months, we can reasonably expect the number of fuel poor households across the UK to rise.
Ofgem data shows most energy suppliers are currently loss-making2. In all likelihood these losses are likely to grow as more customers struggle to pay their bills, resulting in rising bad debt provisions and write-offs. Even those profitable energy firms may struggle going forward, which in turn may adversely affect their ability to support the genuinely fuel poor. That would be bad news because, despite some occasional bad publicity, most suppliers do a pretty good job helping customers in financial difficulty.
Doubtless more can still be done to use available data to help proactively identify those most in need, whilst firms need to continue to support and train their front-line agents on how to handle difficult and challenging cases.
And at the same time, energy firms will need to focus on preserving their cash position and balance sheet reserves, ensuring that those who can pay, do pay.
Cash is king
The peak of profitability for the energy industry was 2016, when margins were a little under 4.5%. All things considered, that doesn’t leave much scope for rising costs and bad debt provisions. The increase in underlying wholesale energy prices, coupled with an end to the furlough scheme, as well as increasing inflation, is all going to place further significant upward pressure on the cost to serve and a downward trend in margins.
New entrants often focus obsessively on growing their customer base, frequently at the expense of basic financial management, perhaps hoping they would be able to address this later in their evolution, once they were big enough and had ‘scale’. It’s now evident this strategy doesn’t work so well in these tough market conditions. Industry experts are predicting more failures and even some of the larger, more established providers’ balance sheets and cash flow will be stretched to cope with the difficulties that likely lie ahead.
What are the challenges ahead?
Here are just some of the likely challenges in the coming months:
What can be done to mitigate these risks?
There are numerous actions that can, and should, be taken to improve collections, whilst supporting customers in need.
Many firms, not only in the energy sector, are increasing their capacity to speak to customers via their contact centres, whether by recruiting internally or securing third-party services. In order to keep costs low, a number are also assessing their digital channels, with a view to encouraging as many customers as possible to self-serve, especially for more basic interactions.
Given the expectation of more customers likely to be in financial difficulty or suffering from other personal vulnerabilities, a number of firms are putting their agents through additional training, with modules focused on how to identify and support these customers. The best approach is to recognise that agent training is not a one-time exercise.
Other actions include:
It’s perhaps a bit obvious to say, but these challenges are not exclusive to the energy sector.
How can Just help?
We work with Utility Companies to resolve problem debt.
We offer services to help recover both live and final debt covering the whole lifecycle from Data, Analytics and Insights through DCA placement and litigation to enforcement.
Our solutions are designed with each client to ensure that we are representing their interests first and that we understand the importance of debt resolution to them.Our technology allows us to design a variety of strategies that drive desired outcomes. We recognise that one Utility Company will look very different from another and it's our job to understand each client and what's important to them.
We maintain responsibility for the end-to-end process and for the monies recovered. Our solution enables buyers to procure services once, but then receive and maintain access to a diverse supply chain of enforcement agencies throughout the contract term. We give buyers choice and enable them to trial new suppliers, champion challenge existing suppliers and introduce more diversity to their supply chain throughout the contract term. Just maintains full responsibility for the enforcement process, the buyer's requirements, the supplier's performance and ensures that reputations are protected while completing the difficult task of late-stage recoveries. We maintain relations with the main Telco and Utility Regulators to ensure industry leading compliance standards are delivered and maintained.